Will dovish Yellen become hawkish?

Will dovish Yellen become hawkish?

Janet Yellen leaves the post of the Fed chair this Friday, February 2. The policy of Yellen was known more as dovish, she used to be cautious and did not hurry to tighten policy more than necessary. However, now experts expect a hawkish-sounding speech from her.

The final meeting of Yellen as a chair of the Fed has started yesterday and ends today on Wednesday, January 31.

Janet Yellen has spent 4 years as the chair of the Federal Reserve. She began the slow process of normalizing interest rates after her predecessor led interest rates to zero during the financial crisis in 2008. Yellen also started reducing the Fed’s $4 trillion balance sheet. Her policy is highly appreciated (although apparently not by Donald Trump).

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So what will she say in her last speech?

During this meeting, Donald Trump’s recent tax cuts will be discussed. It is possible that Yellen will announce a positive effect of tax cuts. This conclusion is based on holiday consumer spending and business investment. So it could mean that interest rates will rise more likely sooner than later. But at the same time, it will depend on the new Chairman Mr. Powell, who is supposed to continue the policy of Yellen, however, we may see some deviations.

Also, experts are waiting for bullish commentary regarding the economy in general. For example, J.P. Morgan economists expect that the Fed will describe the economy in a positive way adding that “easy financial conditions” support the growth.

Such indicators as higher commodities prices and progress in manufacturing and services sector will support the hawkish mood of the Yellen’s speech.

Although inflation is below target, it has firmed and core inflation rebound will be taken as the main indicator of a positive forecast.

However, experts do not expect any increase in interest rates now, but they suppose that positive comments about the US economy will give a sign of an interest rates rise in March. 

Despite the anticipated hawkish-sounding speech, the US dollar decreased against most other major currencies. But other events, such as Trump’s unclear address, should be taken into account as well.

Making a conclusion, we can say that in spite of the fact that Yellen’s policy was evaluated mostly as dovish her last speech as the chair of the Fed is supposed to be hawkish because of the good indicators of the economic growth and first results of tax cuts. The Fed will not make any statements about the interest rate, however, the address of Yellen will give clues of its soon rise.

 

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